An Unsettling Statistic

 

As is often the case, politicians in Washington are arguing about raising the debt ceiling for the United States. To me, it has always been something of a theatrical pose as they will eventually raise it at the last minute. Actually, it serves no real purpose except to remind them and those of us paying attention to how high the total U.S. debt is.

 

What the media, in my mind, should be paying attention to is a simple calculation that speaks volumes to me. It is total debt to Gross Domestic Product (GDP) expressed as a percentage. I have followed it forever. When Ronald Reagan took office in 1981, it was 31. Twelve years later after George H.W. Bush did the handover to Bill Clinton, it was about 60. Clinton And George W. Bush held the line pretty well and we actually had a balanced budget at one point (under Clinton) so the statistic only crept up to 68. Since then, it has risen dramatically and the last figure that I could find was that the U.S. total debt to GDP was pegged at 129.

 

It is just a number you may say but how does it stack up against the debt levels of other countries? Okay, here is what I have been able to find out recognizing that the numbers change each quarter:

 

 

 

United Kingdom           105

Canada                        118

France                         116

Spain                           120

UNITED STATES        129

Portugal                       134

Italy                              156

Greece                         206

Venezuela                    350

 

Will we be playing tag with Italy in few years? It is possible.

 

Some Northern European countries such as Denmark, Holland and Norway weigh in at round 50 as does Australia. Germany, the largest economy in Europe is about 70 (since the great runaway inflation of the Weimar Republic in the early 1920’s plus the aftermath of World War II, Germany does not like public debt).

 

Again, you may say so what—it is just a number. The World Bank suggests that when your ratio of debt to GDP goes over 77, growth in the economy is hampered by debt service and slows expansion. The more you go over the benchmark, the harder it is to grow. Additionally, your credit rating declines as the possibility of default grows. Would you rather buy an Australian bond or a Venezuelan bond? I think you do not need to do some sharp figuring to decide on that one.

 

Yes, we are the United States of America and the dollar is the global reserve currency. We also are the top military power. Are we headed for default? I would say no as our debts are in dollars and the government can simply print money to cover it. What the purchasing power of those printing press dollars would be is another thing, but, nominally, we would not default on our obligations.

 

Greece and Spain are not in such an enviable position as their debt is in euros which they cannot control. Ditto places such as Argentina which has had debt problems for a few generations and can often only get financing which has to be paid back in “hard” US dollars.

 

So, default is not imminent no matter what the doomsters say. Yet, when I look at the debt to GDP ratio every few months, it gives me pause.

 

I have never been more confused about the state and direction of our economy. This unsettling statistic on debt to GDP does not help any and those in the media world rarely mention it.

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.